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Received a general mailing from them yesterday to update commissions and fees. They also say that if you have a master limited partnership (MLP) in a Vanguard IRA brokerage account, Vanguard will begin to charge you a fee of $300. It says Vanguard is responsible for filing IRS 990-T for these situations.

Does it really say that Vanguard will charge you a fee if you just own the MLP in an IRA? Or does it say that, when Vanguard is required to file a tax return, that they will charge the fee for filing the tax return? My guess is that they only charge the fee when they have to file the tax return, which is any time UBTI (Unrelated Business Taxable Income) exceeds $1000 for the year. While that may not happen every year, it is very likely to happen when you sell an MLP. That's because when you sell the MLP, any non-dividend distribution (used to be called return of capital) of the partnership income that occurred while you owned the MLP will be recaptured and be taxed at ordinary income rates. Because IRAs are tax-deferred or tax-free accounts, they cannot take advantage of the tax-free benefit of non-dividend distributions. But they do have to pay taxes on the recapture of those distributions when the partnership interest is sold. Because the IRA is not in the business of doing whatever the partnership does (pipeline, oil and gas exploration and production, etc.), the income is considered unrelated to the IRA, and therefore is UBTI.

Note: It may not be just when you sell - it can also happen when an MLP converts to a C corp, which you have no control over, as Kinder Morgan MLP owners discovered. And you better have the cash to pay the tax bill available in your IRA, because IRAs are not allowed to use margin.

I don't know if other brokers will follow suit with a fee or not.

My understanding is that Fidelity already does charge a $300 fee for filing a 990-T for an IRA, and has for at least of couple of years. Before $0 commissions, my understanding was also that Schwab didn't charge a fee, but if they haven't already changed their policy, I wouldn't be surprised if they do.

The paragraph that talks about this does not mention whether their fee also includes Roth IRAs, or if a 990-T filing is required by IRS for a Roth

Any type of IRA that has UBTI in excess of $1000 is required to file a 990-T, Roth or Traditional.

The SECURE Act, which requires all IRAs to be fully disbursed 10 years after their owner dies basically ensures that someone - either you or your heir - will eventually have to sell the MLP, and is likely to generate enough UBTI to trigger the requirement to file a 990-T due to the recapture rules.

AJ
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